DALLAS – The Port of Houston, one of the nation’s busiest, has lost its triple-A from Fitch Ratings, but the two-notch downgrade to AA is due to legal and technical issues rather than business trends, analysts said.
The rating drop affects about $658 million of unlimited tax bonds and follows a legal review of the special revenue status of pledged taxes supporting the bonds. The Houston port’s debt is backed by a property tax levied in Harris County, the nation’s third most populous.
Fitch analyst Seth Lehman said the rating change resulted from a process that was outlined in a 2016 report.
“We laid out a few issues for those sort of enterprise issuers where they issued bonds supported by property taxes,” Lehman said.
The downgrade reflects Fitch’s new rating criteria for tax-supported transportation infrastructure enterprises, Lehman said. Under the new criteria, Fitch caps property tax-supported bonds at the issuer default rating unless there is a “reasonable basis” to consider the pledged revenues to be “special revenues” under the U.S. Bankruptcy Code’s Section 902(2)(E).
On May 12, Fitch gave the Port Authority an issuer default rating of AA but maintained a triple-A on unlimited tax-backed debt pending a legal review.
Fitch cited factors that could weaken the special revenue status of the bonds, given the definitions outlined in the bankruptcy code. They include clear restrictions on the use of pledged revenues for identified projects and clear separation from the issuer's operations.
“Although an opinion supporting special revenue bond status can reasonably be given, Fitch criteria sets a high bar for rating bonds without regard to an issuer's operating risk when based on the provision of Section 902(2)(E),” Lehman noted in the rating report. “In addition to a legal opinion, the criteria looks for elements that altogether lead to a judgment by Fitch that there is negligible incentive to challenge the special revenue status in bankruptcy. In this case, the law does not directly limit the authority to levy a specific tax to the financing of specific capital projects.”
Although disappointed with the downgrade, Port of Houston Authority "does not believe that this rating action will have an immediate impact on its borrowing costs," spokeswoman Lisa Ashley said.
"If Port Houston issues new bonds in the future, however, investors seeing Fitch’s rating action may require a higher yield, which could increase Port Houston’s borrowing costs," she said. "On the other hand, the fact that S&P and Moody’s continue to rate Port Houston’s unlimited tax bonds at ‘AAA’ and ‘Aaa’, respectively, may mitigate that risk."
Fitch also cited the fact that Harris County’s treasurer doubles as treasurer for the port authority, “which Fitch believes could incentivize a challenge to the status of the funds under 902(2)(E).”
The port still carries triple-A ratings from S&P Global Ratings and Moody’s Investors Service with stable outlooks.
The port's $658 million in rated unlimited tax bonds outstanding are all fixed rate, with final maturity in 2039. Debt service is funded from voter-approved property taxes in Harris County.
The port authority has no revenue bonds outstanding. However, its flexible-rate revolving notes program provides up to $300 million in senior lien revenue-backed debt maturing in three years, which can be replaced either with a comparable note or with longer-term obligations.
The Harris County Commissioners Court annually sets the tax rate to cover debt service, while revenues from cargo services and facility rentals fund the authority's ongoing operations.
With more than 4.3 million residents, Harris County includes the city of Houston and more than 25 municipalities, and 20 school districts.
Per capita effective buying income equates to a good 102% of the national level, according to recent census figures. Market value per capita, a wealth indicator, is about $77,000, which S&P Global Ratings analysts consider “strong.”
The Port Authority owns, operates, and leases eight public terminals and other facilities on the heavily industrial Houston Ship Channel that includes more than 150 privately owned terminals and facilities.
The Houston port ranks second in total tonnage in the U.S. behind New Orleans and ranks first in petroleum, steel and project cargo, according to Fitch.
The port’s capital program is expected to total slightly under $1 billion and may require future borrowing, with expectations that additional unlimited tax bonds would be a primary source, Lehman said.
“The rating reflects the port's expected ability to service anticipated future debt under various sensitivity scenarios at strong coverage levels and low leverage levels that are commensurate with a 'AA' rating,” the Fitch report said.
After strong growth over six years, the port’s operating revenue showed a 1% decline in 2016, according to its statistical report.
Port Houston container volume increased by 14% during the first half of 2017, officials said. Port Houston led the top 10 container ports in the U.S. in import growth during that same time.
“Record regional population growth, Houston’s low-cost environment and strategic location have fueled expansion of Houston’s import distribution center cluster,” port officials said. “As an operating port, Houston is also proactively expanding hours of operation in response to forecasts that call for additional record growth in coming years, particularly as new petrochemical facilities along the Houston Ship Channel come online and produce more plastic resins.”
Port Houston is the largest container port on the U.S. Gulf of Mexico, handling nearly 70% of all containers that move through the Gulf.
“Port Houston has already handled nearly 20 million tons of cargo this year, reflecting an increase of 13% from the same period last year,” executive director Roger Guenther said at the July 25 meeting of the Port Authority Commission.
Container volumes through July increased by 14% compared to the same period last year, and more than 1.7 million tons of steel crossed Port Houston wharves, reflecting a year-to-date increase of nearly 50%, Guenther said.
The port’s Barbours Cut Container Terminal is awaiting three new Super Post-Panamax cranes to serve the larger container ships that can now traverse the expanded Panama Canal.
The $33 million purchase of the cranes was approved by the Port Commission in 2015, and they are expected to be delivered to Barbours Cut around Oct. 7.
The 405-foot-tall cranes are part of a $700 million modernization program under way at Barbours Cut to increase cargo-handling efficiency and capacity.
Economists in the U.S. Gulf region anticipate steady growth in coming years due to increased production and export of plastic resins after several plant expansions along the Houston Ship Channel come on line.
Barbours Cut, the first container terminal to serve the Gulf region, celebrates its 40th year of operations this year.
Port Houston also owns and operates the Bayport Container Terminal. Both facilities can serve 45-foot draft vessels, and together are responsible for nearly 70% of all of the container cargo business along the Gulf Coast, and 95% of the container activity in Texas, according to port officials.
Texas ports have stepped up dredging and other preparations for the Super Panamax ships in recent years in anticipation of the Panama Canal expansion that was expected to divert some of the Asian traffic from the West Coast ports.
But Fitch analyst Emma Griffith said the growth from the Panama Canal is looking more incremental.
“I think we’re seeing a little bit more traffic,” she said, “but it’s not a paradigm shift. You still see a lot of traffic going to the West Coast.”